How ex-Billionaire Eike Batista lost $25 billion in 18 Months

The consensus tends to shrug off the adverse impact of having too much debt. They never seem to realize that whatever illusions of prosperity brought about by having too much debt can be lost in a snap of finger.

Former Brazilian billionaire Eike Batista’s case, which I earlier raised, is a wonderful example of an individual’s boom-bust cycle.

Here is a snippet from CNBC-Reuters:

Since then, things have gotten worse for Batista. Hit by mounting debt, a series of project delays and a crisis of confidence, his six publicly listed companies have suffered one of the most spectacular corporate meltdowns in recent history.

The Brazilian billionaire, who dismissed his critics as he sold investors on the promise of OGX's oil discoveries, was also EBX's biggest investor. He pumped billions into the group's companies even as share prices plunged by as much as 90 percent.

His own fortune - the world's seventh-biggest last year, according to Forbes - has declined by more than $25 billion over the past 18 months.

OGX's failure - and the subsequent unraveling of EBX - reflects Batista's initial success in overselling investors on oil discoveries that proved to be more difficult to recover than they expected.

But the story is not so simple. His empire also fell victim to the sudden end of both the global commodities boom and a wild exuberance for emerging markets - two forces that attracted investors to Batista's vision.

Mr. Batista is now only worth $200 million from over $30 billion according to Celebritynetworth.com

Mr. Bastista is a high profile case, but there are other figurative riches to rags (lost billions) story  such as Zynga’s Mark Pincus Chesapeake Energy Aubrey McClendon and Softbank’s Masayoshi Son (Forbes)

The bottom line is that the fatal cocktail mix of overconfidence, aggressive expansion using debt and patent disregard of risks can lead to evaporation of one's wealth. Much of today's debt financed illusionary wealth will be unmasked once the interest rate environment radically shifts.

 

Wealthy Swiss Hold Cash and Gold on Fears of the Euro’s Doom

From CNBC,

If you want proof that the world’s wealthy are worried, consider this: Swiss banking clients have nearly a third of their portfolio in cash. And one in five believe the Euro will collapse.

The findings are included in a new report from LGT Group, the Austrian banking company, conducted with Austria’s Johannes Kepler University. The study found that wealthy Swiss and Austrian private-banking clients remain highly risk-averse and fearful of inflation, sovereign debt defaults and the unstable financial system.

In Switzerland, 58 percent of private banking clients have lost confidence in the financial system. Forty-four percent worry about inflation.

Fully 22 percent expect the euro zone to collapse. The number was the same for Austrian clients. Only 15 percent of Swiss and 16 percent of Austrians say the lessons have been learned from the euro crisis.

The study also said clients are reducing their diversification strategies and retreating to gold, cash and their home markets. Only a small fraction of clients are out to get better returns than the broader market.

I sympathize with the position of these affluent Swiss banking clients. The financial system has indeed been unstable and has become too dependent on political steroids

And I think that the present concerns goes beyond the Euro crisis as current woes seem multipronged: the BRICs (especially China) and the US too.

Yet geopolitical events, which has been holding the global financial markets hostage, has been very fluid and can move very swiftly and dramatically which would likely incite even more volatility in the financial markets from what we are seeing today.

Uncertainty prevails.

For Parents who Think that their Kids are Unfit for Inheritance, Try Brewster’s Millions

Some wealthy parents think that their kids are not qualified to inherit their fortune.

According to CNBC, (bold emphasis mine)

A new study from U.S. Trust says that only half of millionaire baby boomers think it’s important to leave money to their kids. A third of them said they would rather leave the money to charity rather than their kids.

There are two explanations for their stinginess.

The kind explanation is that today’s boomers want their kids to grow up with the same middle-class values they had. They want their offspring to learn struggle and hard work and failure and the joys of earned success and all the other lessons that helped the boomers become successful (those, along with 30 years of bull markets and strong economic growth).

As Warren Buffett said, he wants leave his kids enough to do anything they want, but not so much that they can do nothing.

Aligned with this benevolent explanation is their commitment to charity and the broader world.

The second and perhaps more realistic explanation is that boomers don’t think their kids can handle all that money. Only 32 percent of baby boomers are confident their children will be prepared emotionally and financially to receive a financial legacy.

Granted, not all generations feel this way. Gen-Xers and Gen-Yers, along with the generation older than the baby boomers, are more disposed to leave money to their kids. More than two thirds of those aged 18 to 46 and those over 67 say it’s important to leave a financial inheritance to their children.

“Our survey points to a shift in generational behavior and outlook, most likely shaped by personal experience and societal responses to economic realities,” said Keith Banks, president of U.S. Trust. “The next generation has not experienced the consistently strong economic growth or investment returns that baby boomers experienced during the longest bull market in history.”

And there may be a third explanation: the baby boomers plan to spend most of their money. Given the low investment returns in today’s markets, their long lifespan and their famously non-apologetic lifestyles, the boomers are probably burning through their fortunes at a rate that won’t leave much for the next generation.

In the end, however, the phenomenon outlined in the survey boils down to a simple problem: The baby boomers have raised kids who are unequipped to inherit large amounts unearned wealth.

I think that this subject is strictly subjective and a familial issue which can NOT be judged as a one-size-fits all thing as every family has their own idiosyncrasies.

The issue of inheritance derives from many complex intertwined factors in terms of people relationships—particularly psychological, behavioral and ethical aspects—that includes among others the perception of the degree of interpersonal relationship, individual attitudes, values and work ethics, learning ability, acquired traits, and more.

Nonetheless, for the heck (or fun) of it, parents who think that their children are unfit for inheritance, may want to try the Rupert Horn approach (the great uncle of Monty Brewster from the 1985 comedy film Brewster’s Million starred by the late Richard Pryor-and also the late John Candy).

Millionaire’s Portfolio: Collectibles are the Rage

From the CNBC

Collectibles are all the rage. From the $120 million hammer price for the pastel of Edvard Munch's "The Scream" to the run-up in prices for diamonds, wine and antique cars, the collectibles market (or “passion investments” or “treasure assets”) is booming on the back of demand from wealthy investors.

For the rich, Burgundy and sapphire are the new black.

But financial expectations for collectibles may be surpassing reality.

A new report from Barclays Wealth shows that among global investors with more than $1.5 million in investible assets, collectibles and precious metals now account for 9.6 percent of their total wealth. The numbers are even higher in the United Arab Emirates (18 percent) and China (17 percent).

As Barclays points out, wealthy investors like collectibles because they want “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Yet Barclays says that “the world of collectibles thrives on fairy tales” like "The Scream" sale, calling collectibles markets “riddled with inefficiencies, "frequently opaque and illiquid," and "extremely volatile and risky.”

Reasons for the growth of collectibles as a share of the portfolio of the millionaires, according to Barclay: Emotions, Hidden Cost, Opaque Markets, Correlation and illiquid.

Yet it would seem misguided to lump arts, wines, precious metals and jewelries as a single asset ‘collectible’ class, as the utility and reservation demand functions of these items are different.

Some of the wealthy people will buy because of aesthetics, enjoyment and or for social status.

But it isn’t a ‘fairy tale’ when wealthy investors say that they had opted for ‘collectibles’ out of “tangible, scarce and non-fungible investments" that “could provide a stable store of value in uncertain times.”

Bluntly put, 'collectibles' represents as insurance against counterparty risks and are ‘real’ assets for the millionaires.

What truly will be exposed as fairy tale are the colossal financial claims at the fractional reserve banking system. The euro debt crisis signifies an ongoing manifestation of such a process.

Thus, the increased exposures by millionaires on 'collectibles' reflect on the present economic and financial realities.

Risks of Too Much Wealth: Family Feuds

One of the major risks from having too much wealth: Family Feuds

Wall Street Journal’s Robert Frank writes,

One reason more wealth doesn’t always bring more happiness is family conflict.

According to the study, conflicts are more likely with higher wealth levels. When asked whether wealth creates family conflict, 40% of those with net worths of $1.5 million to $3 million agreed. Yet among those with $15 million or more in wealth, 46% agreed.

The Philippines has not been a stranger to this. Some of the famous family squabbles has been covered or reported by media.

For instance this from the Philstar.com (2002)

In the Philippines, among the famous family feuds include that of the Cojuangco clan, with the Cory Cojuangco-Aquino side versus the branch of first cousin Danding Cojuangco (a feud which crossed over to the level of national politics); the Zobel-Ayala split between first cousins Jaime Zobel de Ayala and Enrique Zobel; the disagreements among the third-generation Soriano siblings of Anscor; the recent and much-publicized Ilusorio family feud involving warring spouses with three children on each side; the Uytengsu-Young conflict between brothers-in-law in General Milling and Alaska Milk; and the feud between the late Senate President Gil Puyat Sr. and his sister, which caused a split in the Puyat business empire, among many others.

The article cites more cases and attributes the unfortunate familial disputes to the failure to “institutionalize an orderly and clearly-defined succession” or from not having a succession planning-management.

While the lack of succession planning management could signify as a substantial variable in the partitioning of the inherited property rights, I would add that, to my opinion, divergent value scale of members of the family and the base impulse to appropriate than to generate wealth as the other contributing factors.